Bio-Rad Laboratories, Inc. (BIO) Earnings Call Transcript & Summary

Perfect. Good afternoon, everyone. This is Rachel Vatnsdal from the Life Science Tools and Diagnostics team here at JPMorgan. It's my pleasure to introduce our next company, Bio-Rad. So this session will be a 40-minute fireside chat. [Operator Instructions] And with that, we can get started. So thank you, Norman, and Ilan and Andy for joining us today. To kick it off, we could just talk about, in general, the strength that you guys have seen in the past 2 years.

So the strength that you guys have seen has been in partly due to strong contribution from COVID-related sales. So with new variants likely to continue to emerge, how should we be thinking about the durability of your revenue in the coming year? And then what do you see for '23 and beyond?

Well, thanks for the question, Rachel. This is Andy. As it relates to COVID component of the last 2 years' performance, we did just north of $300 million in 2020 and guided to about $245 million for this year. For us, it has been primarily instrumentation, as we contributed to building capacity for the PCR testing market. And we believe that, that is largely a saturated market now. We've been seeing a downtick as we had expected in placements through 2021. It is -- with the Omicron variant, it's -- it does create a little bit more of a curveball as you look forward. But I think our experience is you get outbreaks and pockets of demand in more peripheral markets. The main population centers, the main developed countries really are -- they have capacity now on the instrument side. And so it's a big tail off on COVID revenues for us coming into the end of '21 and into '22. But we may see some pockets of opportunity as we go through the year.

Yes. I think the idea of the expanded installed base of instruments, maybe the ability to capture additional consumable sales, those kinds of things and, of course, we also see wastewater surveillance as an opportunity in part of our business. So we are looking to see how we could leverage that larger installed base, especially what we think of as a newer installed base, which is in more hospital labs, our traditional installed base of PCR instruments has been in the academic side.

Add on the Seegene relationship to that equation as well.

Yes. Yes, that's true. We did create this partnership with Seegene, a very -- they have a very interesting portfolio of high-quality assays that we think we could port onto this installed base. .

Hopeful. So staying on the topic of COVID, you guys experienced a recovery in your business this year despite all the COVID variants that we've seen. So when do you expect it back to full normalcy and what do you think are the key factors that Bio-Rad needs to get back to your pre-pandemic growth trajectory?

So Andy, you want to take that?

Sure, I can take it. So our general perspective is the markets have come back strongly through '21. I wouldn't say I'd characterize them as 100% back to normal, but they're operating between 90 -- 90%, 95% of normal. And that's on both the Life Science and diagnostic side of the equation. There's an exception area on diagnostics, where we have blood typing testing, which is very much correlated with elective surgeries, which haven't fully recovered. And now with the Omicron wave, there's a lot more pressure on elective surgeries right now. But broadly speaking, recovery has looked good. Omicron could put a blip in getting back to 100%, which everyone anticipated for this coming year. But we don't certainly -- we don't see it as anything that's like a real return back to the times of 12 to 18 months ago. People have learned to live with this and work around it.

Yes, very true. So shifting over to some funding questions. So the funding environment for the industry has obviously been very strong in recent years. So how do you see it evolving in a post-pandemic world as COVID eventually winds down? And then do you view the increased investments in biopharma sustainable?

So yes, I'll take the first part of that. We do see this, the research market and government funding broadly is being very healthy. If you look at what's being proposed now for the NIH budget next year, it's double digits. I don't think we've seen that for a number of years. I think that for better, for worse, COVID has highlighted this need for everybody to be prepared for public health concerns and emergencies, and there does seem to be a political willingness to support research funding, at least for the next few years. So it seems like a good outlook on that side.

Maybe I'll add on to the biopharma segment.

Sure.

Our investments -- we are investing in biopharma in both product and channel. We definitely view this as a sustainable opportunity. I think that the macro trends supporting the biopharma industry are very solid. And we've largely been underpenetrated there historically. So for us, it's a strong growth trend with kind of a penetration opportunity as well. So we think the investment in this area is really a good return and very sustainable. .

Great. So shifting over, let's focus on one of your key growth drivers, Digital Droplet PCR. So the applications for this tech continues to grow, and you talked about it being a $1 billion opportunity. So how large can that opportunity get over time? And what is driving the recent acceleration?

So yes, this is an opportunity, what I would say, an evolving TAM, an evolving total available market. The myriad of applications are all driven by the need for high sensitivity to understand rare events. And that's broad-based in different areas of both academia and particularly in biopharma, strong trend lines around cell and gene therapy as a result and because it's a workflow that is highly quantitative or an instrument platform that's highly quantitative. And so our view of the market potential is ever expanding. We'll put more dimension around that when we do our Investor Day late in February. But it's evolved from $500 million, in our view, a few years ago to $1 billion plus to many billions now as we look at this -- the series of markets, the different end markets that digital PCR is relevant for. So these -- in terms of applications, they range from counting viral particles, all the way through to rad-genetic mutations. There's new diagnostic indication opportunities and just high-sensitivity gene expression for rare events in the oncology or liquid biopsy market. So that's just a flavor of the breadth of the opportunity from an application perspective.

Great. And then going off of that, you've mentioned that one of the emerging growth drivers of digital PCR is COVID wastewater surveillance. So how meaningful is that to your digital PCR business? And how much we're going to get? And then going off of that, what needs to happen with digital PCR to supplement your digital PCR and wastewater surveillance?

Yes. So it's become kind of a topical application opportunity because of COVID, and it's got into the spotlight as a means of early identification of outbreaks. So digital PCR is relevant simply because it works really well in kind of mucky samples, so to speak, and it's very tolerant of them, and it's very sensitive. It's not -- it's a relatively small amount of our total business. It's interesting and it's certainly a growth opportunity, but it's not the largest of the opportunities that we see. Digital PCR supplanting qPCR is probably driven by the funding -- the backdrop of whatever government funding. I think it's a more price-sensitive market. And so if there were to ever be a complete switchover to digital from qPCR, I think you've got to get to parity on pricing. qPCR does work. It's just not the best solution.

Great. So let's spend a moment on your recent acquisition of Dropworks. Can you speak a bit more about why you made this acquisition? And then what should we expect in terms of when will the product reach the market? And will Dropworks cannibalize any of your existing qPCR sales or why not?

So I could -- maybe I could start on that one. Certainly, we do view it as an expanding area for us. We've kind of started out in the kind of the middle of the market, and we've moved to the high end of the market with more and more sophisticated instruments. But this gives us an opportunity to participate in what you call the low end of the droplet digital PCR market, which should develop over the next couple of years. To a certain extent, it could cannibalize some of the existing qPCR market, kind of depending on price and the price performance. We -- this Dropworks that we bought, the product was and still is in development. Can probably take another, I don't know, 12 to 15 months to get it to market. But obviously, we're pretty excited about it.

Great. And then, Andy, you mentioned the upcoming Investor Day. So we have a question over e-mail asking, well, what can we expect at that Investor Day? And do you expect to launch new targets during that?

Ilan can answer that. Yes.

Yes, we do plan in the Investor Day to extend our kind of outlook through 2025. We plan to have some review of some of our products and initiatives that are ongoing and some of the initiatives that we plan to take -- will take us through 2025. But the short answer is, absolutely, we do plan to extend the visibility through 2025. .

Great. Thank you. Shifting over to biopharma. So biopharma has obviously been a key area of growth for you. How are your products positioned and differentiated relative to other large competitors such as Thermo and Danaher? And then as you make inroads in biopharma, is there any halo effect on the rest of your product portfolio?

Yes. Biopharma is a relatively new market segment for Bio-Rad. And we've been leading the market segment penetration strategy with digital PCR and also specialty resins for protein purification or process chromatography as often called. So we've talked about digital PCR and its differentiation. We don't compete directly with the big players in the protein purification, the protein A space. So much more specialty, fine polishing at the end of -- more towards the end of the workflow for the protein therapeutics and also new applications being used in vaccine and some of the gene therapy areas. So these are more targeted, more premium-priced opportunities. So these give us a high-value entry into the segment. And then, of course, we absolutely have the opportunity to sell other products, which we've just not been represented with in that segment before. And so we do get a halo effect from being just simply present in the biopharma segment.

Perfect. So you recently acquired Celsee in 2020 with aspirations to enter the single cell market, which obviously has been hot as of late. So what are you -- where are you in terms of introducing that product? And then how do you plan to go head-to-head against the current market leaders?

It seems like that's me again. So we're very interested in single cell and cell biology. It's a strong market macro driver or trend line. Celsee was acquired. Perfect timing, I think the beginning of the second quarter and the onset of COVID. So we had to integrate that business into the company right when COVID hit. So we lost a couple of quarters, I would say, on our development track. It is an investment play, and we're developing products. We're looking to introduce the early -- the kind of first-generation products from that acquisition second half of this year. And then with follow-on products, we'll provide more detail at the Investor Day that's coming up. We broadly see the field of cell biology and in particular, single cell as a very attractive sustainable growth opportunity, and we intend to be a player. We can't go into the details as to how we're going to compete directly with others at this point. I think that would be something we should save for the moment.

Noted. So shifting your diagnostic business, that presently represents about half of Bio-Rad's revenue. So what do you see for this business going forward as COVID headwinds continue to taper?

So I think it is interesting to -- first of all, I think there's a much better and broader recognition of the value of diagnostics as we come out of the pandemic. It's -- the business is returning to normal. The only part of that business that's a little bit on the bubble is the immunohematology business. And when I say on the bubble, because there's now talk again about elective surgeries being put off. And I would say that to a certain extent, that business is tied to elective surgeries. But the rest of the business has continued to kind of return to normal. Certainly, we see areas of growth ahead, particularly quality controls, autoimmune. We've got infectious disease and diabetes, which are large -- part of large and growing markets. They are a little more on the mature end of the portfolio. So lots of things going on there. We've got a good portfolio of products. And looking ahead, we are investing in molecular diagnostics. There's partnership with Seegene, was mentioned as one potential path to exit it -- to expedite entry into this area. And of course, the idea of what could we do to leverage the -- drop the digital technology into diagnostics.

Perfect. We actually have a few more questions coming in on digital PCR. So could you just talk about the progress in digital PCR adoption within liquid biopsy? And then also, can you leverage the digital PCR as a readout platform for proteomics?

So it's very hard to quantify in real terms the market share adoption of liquid biopsy, but suffice it to say that it's a consistent feedback we get, particularly from large cancer centers and areas of academic interest that the really high sensitivity of the platform, once you know what mutations you're looking for, which is a requirement. If you don't know what you're looking for, sequencing is the play. But if you get into recurrence monitoring or trying to kind of get markers of early indication, we've got a meaningful business that is growing steadily, that is coming from placements into labs, working in the fields of various cancers and in particular, liquid biopsy. So I would say we're very encouraged. I can't get into kind of market specifics, but it's a strong growth vector for the franchise.

Great. So shifting over to some more operational type questions. So COVID has obviously created a logistical nightmare, and then supply chain issues have hit you and many of your other peers over the last year. So what is your view on the inflationary environment and also just the supply chain and how are you thinking about passing on those higher costs to your customers?

Yes.

Go ahead, Norman, it's fine.

Go ahead.

Okay. Well, look, the inflationary pressures, they are real. There's 0 question about that at this point in time. Today, we've been absorbing the cost of increased cost of raw materials through efficiency gains. But where we have the opportunity to pass on price, particularly where we have slightly better pricing power, we are doing so. We know the market is expecting it. Our approach is not to be egregious in how we approach that, but to have a balanced view of pricing increases this coming year. Of course, half of our portfolio in diagnostics is largely contracted. That's the beauty of that side of the business, but you have limited ability to change pricing as a result. So get very conscious of it. We're absorbing where we can, and we will be taking price increases through in the right places this year.

Noted. And then shifting again deeper into supply chain. So as parts and component shortages continue across the industry, how have you been able to meet the seemingly strong customer demand? And importantly, do you have any visibility on when you'll be able to get ahead of these supply chain issues? Or do you see these shortages persisting? And could it potentially dampen your growth rate over the next few years?

We've had some -- we've had our challenges. I think we're in the same boat as the rest of the industry. The way it manifests for us is you lose some predictability. You cannot be as confident on your forecasting, both on production and therefore, on ability to supply customers. That showed up as a broader guidance range for us in Q4 for our revenues. And so how do we think about it moving forward? Well, Q1 seems very similar to Q4, as you went to -- in terms of supply chain challenges. I think there are indications that supply is improving as we move into Q2, Q3, but that very much depends how the Omicron variant plays out and can we get sufficient workers back into all of the vendors that's sitting in the supply chain. So we kind of think in 2 quarter buckets right now in terms of supply. It's pretty hard to predict beyond that. But improving, but not out of the woods.

Okay. Shifting to some more M&A-focused questions. You've talked about an increased appetite for a larger transaction for the past year or so. So can you just talk about what's really been the hold-up on doing a transformative acquisition? Is it asset prices in valuation, given they're extremely high fit or anything else? And would you be disappointed if you couldn't get a larger acquisition done in this upcoming year?

That's a big question. So I think that if I look back 4 or 5 years ago, when we were in the middle of the -- our ERP implementation and the reorganization of the company, it would have been a little too much to layer on something larger or more transformative. Now that we're through a lot of that, I think we do have an increased appetite and a focus for doing something larger, with the idea it could potentially broaden our reach in either life science or diagnostics. If you look around, you think about the larger possibilities, there's not a long list to choose from. So -- and we want to be careful that what we choose makes sense. We're very return-oriented. So valuations do weigh in with us. So we're conscious of that. And we like to think we're pretty good stewards of the kind of the investors' money and the trust that's been put in us. Definitely, spent a fair amount of effort on this front. And I guess I would really hope that we could get something done in the, say, the next 12 to 18 months.

So going off of that, we just got a question in over e-mail asking, do you see any current gaps in the portfolio? And then going off of that, could you just walk through your preference for life science tools versus clinical diagnostics for a transaction and then really what would your ideal larger acquisition be for Bio-Rad?

So again, we're open minded, whether it be Life Science or diagnostics. We want to do something that fits, that -- where we can kind of bring something to the party, where we can add value, something that would fit in our existing operations, complementary or adjacent to our current businesses. So that's the kind of thing that we've got in mind. .

Great. So outside of...

Just on the kind of size or potential size of large scale, can be on the lower end -- anything that between -- let's define between $1 billion and $5 billion, which we believe we can finance with our strong balance sheet, continued generation of free cash flow, leverage ratio of up to 3x on a gross basis and some additional equity. So that cover kind of -- that will cover the lower end of large scale. We are also open-minded to the higher end, which is more around a merger of equals, an MOE. But as Norman mentioned, I mean, there aren't many opportunities out there. But we do spend a lot of time to try to entertain one.

So as you mentioned, you guys have been doing a number of partnerships and other business development activities, such as your partnership with Seegene and additional tuck-ins. So can you just share with us your thinking here on how do you balance your growth strategy, from balancing tuck-in opportunities or a more transformative deal?

Ilan, do you want to take that?

Yes. Andy, do you want to elaborate more on the Seegene or the other one?

Tuck-ins for us, they're very much focused on a tight fit to our strategic direction, enhancing or extending a technology or platform position. And so you've got to balance that. They're usually R&D hungry. So we make very good decisions around the plays we wish to make there. And so we've got a number that we've done recently, which we're investing in, and we will bring product to market. So those tuck-ins, that's kind of more run rate strategy execution versus maybe the transformational side. And if you wish to add on that, Ilan, feel free.

Yes. I mean, generally, we try to entertain 2 or 3 of those a year. Definitely, it's something that we also kind of complement with our ongoing R&D spending and initial internal kind of projects that we have. And unlike the large-scale transactions that we just discussed, the tuck-in ones, the small ones are more available. It's just about the level of premium that you are willing to pay. That's probably the main difference. And similar to the large-scale transactions, also the smaller tuck-ins' valuations right now, are pretty frothy.

Yes. .

So can you just talk about how your ownership and the long-term strategic interest in Sartorius is influencing your thinking as you pursue a transformative acquisition? And does that limit you to transactions of a certain size?

So first of all, I think it's important to state that, as we've said many times, we do view Sartorius as a strategic asset. We're not looking to monetize for, say, share repurchases or a onetime dividend. And if we think out another 7 years or so when the Sartorius trust would dissolve, an acquisition could become available to us. . Certainly, in the meantime, if a more strategic opportunity comes along, we do have the ability to use that position to help consummate another large acquisition. So we don't see it really limiting our ability to do a transaction. We also generate strong cash flow. We'd be comfortable with levering up. And we could always use some equity for a transformative acquisition, if that made sense. So there are a lot of things we could do. We could always actually consider a merger of equals if that opportunity became available. So we've got lots of options there.

Great. And we've got a few questions coming in over the line on a more higher level. So this one says, what do you see is the biggest opportunity for Bio-Rad this year? And how do you believe you may be well positioned to access it?

Well, I think -- maybe I'll start and you guys can pile on, but it just seems that with COVID subsiding and the research market seems to be very robust. The biopharma market is strong. And again, there's a greater appreciation for diagnostics. I think we're in some very good areas at the kind of the macro level.

Yes. I'd kind of add on and say, my view is we're kind of mid-flight on a lot of really exciting initiatives. And I think we've got our strategy pretty clearly laid out. So for me, the exciting thing is seeing it play out in reality. I think it's -- whether that's growth of our digital platform, further progress in our biopharma strategy improving our diagnostic performance, in particular in Asia, and getting new products through our pipeline to impact the business in the next 2, 3, 4 years. So there's not one single thing I could point to. We've been working on transforming the company's profile for a few years now. And we're deep in execution on multiple fronts and feeling pretty good about the direction we're heading in.

Yes. I would add that I agree. I mean, we are basically probably in the mid-innings of the transformation of Bio-Rad. We currently organically have our internal initiatives that we communicated externally through 2023. We plan to communicate additional kind of phase through 2025 next month in our Investor Day. And obviously, with the inorganic transaction that we try to prioritize, I think in a few years, I mean, there is a lot to do, but a lot of sort of opportunities that we're currently working on.

Great. And then we just had another one coming over e-mail about Omicron and its impacts. So what trends are you seeing in electric surgery -- elective surgery procedures, particularly in Europe, and just in general, by geographic split? You've mentioned in 3Q that Delta had caused some difficulty in Europe. So what are you seeing from Omicron and its impacts?

Yes. Go ahead, Andy.

I think we are seeing signs that elective surgeries have kind of taken a backseat for a while. And I believe there was even an announcement, where we're in California, that the state might broadly ask for really noncritical electives to take a backseat. So I think that's real. And we've got -- we have a quarterly reviews of each region. They're kind of pointing to more people being out of the workplace in the middle of this wave, whether that's in a hospital setting or an academic or industrial setting. So I think we might experience just this kind of transient -- a small transient blip due to Omicron and just less people in the workplace. But I do think our current view at least is that's transient. And I think the term -- it's like a blizzard has been used, that the blizzard will pass and we'll come out the other side fairly soon.

Let's hope. So given where we are today, how are you thinking about Bio-Rad's future outlook over the next few years? And then are there anything that you guys think that investors are missing about the Bio-Rad story or things that you think are misunderstood.

Well, I think that is, as Andy and Ilan have alluded to, we've made a lot of kind of changes in the business over the past few years, reconfiguring the organization and getting some kind of baseline systems in place. And I think we're really well positioned to expand into new markets, drive new opportunities. And as Ilan said, we feel we're still in kind of the early innings of making the business more efficient and more effective. And so I guess we're pretty excited about the future. We're a little bit biased but...

An appropriate bias, Norman.

Perfect. And if I could squeeze one last question here from e-mail. Can you just spend a moment talking about funding trends? And do you guys think that you'll benefit from the boost in NIH funding that we expect in '22?

Absolutely.

Yes. Yes. We're bullish on funding trends, the NIH being probably the single biggest bolus of money that flows into our markets. But we have a broad portfolio, a broad footprint of products. I mean, many of them are everyday lab staples. So we're definitely set to benefit as well as on the cutting edge of technology.

Sorry, Andy. I would say not only the NIH budget, but globally, I think there's, again, an increase in -- there's an outlook for an increase in funding both in Europe and in Asia. So I think it bodes well.

Yes. backdrop is good.

Great. Well, that is all the trend that we have for today. So thank you, everyone, for joining. Have a great rest of your afternoon.

Thanks for having us.